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Tuesday, January 24, 2012

SPX Update: Bears' Turn Now?

On Monday, the S&P 500 (SPX) made it into the 1320-1325 target zone I suggested on Friday and reversed; so hopefully the short term wave structures are finally starting to clear up again. There's been no material change in the counts, however there's now enough structure to target some key price markers for the bulls and bears.

The preferred count believes the rally completed in the target zone yesterday, so the bears' line of defense is fairly obvious: the recent 1322 print high. If the market moves above 1322.28, then 1330 becomes the next target; and if that falls, then 1345-1350 becomes the target. The preferred and alternate counts are both reflected on the chart below.

The first alternate count would see yesterday as the completion of wave 3 of c, with 4 down and 5 up still to come -- to rule out that possibility, the bears need to take control of 1296.46. If the downward movement (assuming we continue down after yesterday's reversal) looks tepid and overlaps the same price territory repeatedly, then I would suspect that this alternate count is in play.

A number of markets ran into resistance yesterday, including the NYSE Composite (NYA) and Dow Jones Industrials (INDU), so this seems like a natural area for bulls to take some profits, and for the remaining sixteen bears to make a stand. Below is a daily chart of the INDU; the horizontal resistance faced by the INDU yesterday goes back to the 2007 top.

Yet another top indicator triggered on Monday, as the put/call ratio reversed its downtrend from near-historic lows. This reversal is (yet another) bearish signal. I'd like to quickly rehash the numerous other top indicators we've covered over the past couple weeks, counting backwards from the most recent:

1) VIX:TNX closed outside its lower Bollinger band, while COMPQ closed above its upper band.
2) Nasdaq volume as a ratio to NYSE volume reached unusual highs.
3) The NYA has formed (and continued) a negative price divergence with the SPX.
4) Daily RSI is in the upper "bear-market bounce, heavily over-bought" zone.
5) Daily MACD remains on the cusp of forming a bearish divergence.
6) My 12-year study on investor sentiment suggests that the current and severe lack of bearish investors is virtually always consistent with a top of some kind.
7) SPY has 4 unfilled gaps below the current market, all within the prior 100 trading days. History suggests that these gaps will be filled 90% of the time.

These are some of the statistics and indicators which have kept me bearish recently while the bulls ran amok. Granted, some of these indicators began triggering early, and have kept me from participating on the long side of the market since roughly the 1269 area. Even if an indicator works 90% of the time, there will always be that 10% of the time when it fails. I can live with that. I don't need to trade every move, and when things start to look dicey, then it seems to me that being cautious and patient is not unreasonable. I'll happily take the 90% odds all day long.

To reiterate another factor, I am virtually certain that QE3 will not be announced this time around. Currently, my "no QE3 today" record is flawless, and I'd like to keep it that way if possible. Given all the liquidity flowing into the U.S. from Europe, I would be absolutely shocked if the Fed decided to flood the system further. In fact, indications suggest that the Fed has quietly been taking steps to contract liquidity. So they'll probably give more jaw-boning to the numerous "tools" they have available to continue ruling the world, but I strongly doubt they'll take any significant action at this time.

In conclusion, with several rare, once-a-year (and some even less frequent) top indictors triggering recently, I have to continue to stay with the odds here. I believe there's a very reasonable chance that the top is now in place. Ultimately, however, top calling is the toughest racket in trading, and this one has been less-than-kind to me -- so until bears can break the rally channel and begin taking over some key price levels, conservative traders may want to give the uptrend the benefit of the doubt. Trade safe.

330 comments:

It's okay if you weren't being serious, but I did get a screenshot tonight in reponse to your post over the weekend (below). I can't actually screenshot the bluescreens, because, well... they're bluescreens and nothing works!

But I'm willing to promise to never buy another HP. I think I've given them enough chances.

:)

*************************

"I think we need to have a Pretzel Logic Blogathon to raise money for Blogmaster's suffering from Function Impaired Laptops (FIL). Just post a picture of your blue screen of death. I will match the first $100 ONLY if you promise to never buy an HP again, DELL only with the three year business supreme same hour service where they air drop both the new unit and former Swedish Bikini Team tech onto your mountaintop lair."

damn you are good. thorough. analysts put a supposition out there, stops take care of the rest. don't know what the 'big' issue is (altho i am aware that blogs eat their young during transition periods). thanks for all of your hard work PL

I don't recall anything about a faulting module. I reprinted the message on the weekend thread, and have since closed the most recent one, so I can't look at it again (until the next time it crashes today, lol).

Oh No...I do indeed put my money where my mouth is...I may be a BS'er, but not FOS. But Katzy and I get to assist the techs when they show up. The money is on it's way right after I drop off Darth's lunchbox that I forgot to bring with me this morning.

Oh OK. If you want to spoil all the fun of guessing, the sun is going to come up in HI too. We have a near 100% reliability record as a predictive indicator for sunrises in points west of here. You want to be a little careful when you get out into the Pacific though. For some reason, at some point between here and Asia heading west, we flip over to a trailing indicator.

That's an Event Viewer message in your screen shot. In Win 7, event viewer was folded into Reliability History. If you click the Windows Start menu and type "reliability" (without the quotes) in the Search box, you should see a link appear above to View Reliability History. That will take you to a timeline graph with little red x's and blue i's marked on it. The x's are bad things.

Clicking on an x in the graph brings up a list of bad things that happened on that date in the list box below. Your crash(es) should be listed there somewhere. If you click on an event in that list (the event itself, not the check for solution link) it should take you to that same report you saw on reboot.

Morning, this is my first stop every morning, thanks for turning me on to EW. I'm a small fish in this ocean of traders, and mostly just play with my 401, GE,money market,Ge,money market. exc.exc...... Told my friends when GE hits $43 move to money market and sit on it, I was the laughing stock of the dept. These guys had worked there 30+ years and had amassed millions of dollars only one guy listened to me and got back in at $6 he has since retired.....and still thanks me every time I see him ;•) .....I've been sittin' on the sidelines since the last day of December, still getting poked and prodded ie "wanna buy some GE shares" ha ha.....but I'd rather lose a dollar to the up side than who knows what to the down.....long story short. When the big fish start movin', its time to get out of the way!....thanx for your time..

If I undestand correct, either we are in wave black 4 (PL alternative) or at the beginning of big red 3 numero uno, either way ST;gap down approx 1305 (wave (i) b), gap fill (i) c maybe to 1312, then wave (iii) of black 4 or bigredthree 1.

the above is what 3 months of reading this site have hopefully learned me. Or not learned me, lets see. Have sometime difficulties separate Katzo7s view (who often writes more micro-ST view?) from PLs (more "standard ST, IT, LT view).

Euroland and profit taking will tank the sucker early on. After Europe closed, earnings and US fundamentals will assert themselves plus short covering ahead of AAPL may drive it back up into closing. No?

TY....I wasn't always, and I can tell ya first hand that Karma can be the bitchiest McBitch bitch of all when you're job was to be a ruiner. Life is good now, gotta share when I can, cuz we're all in this together.

You learned me something new today! Here's the message I got after following your instructions:

The computer has rebooted from a bugcheck. The bugcheck was: 0x0000009f (0x0000000000000004, 0x0000000000000258, 0xfffffa8006d3ab60, 0xfffff80000b9c510). A dump was saved in: C:\Windows\MEMORY.DMP. Report Id: 012312-22542-01.It's nice that Windows took a dump and saved it for me. How sweet. :/

So I understood by yesterday, just took a little while when you used the term LT in a few posts in a way not may others used it a couple of weeks ago at this site. No criticism at all, just my language barrier and that I'm very new at this (Ew, trading and so on) and just do it trying to learn.Thanks for your long - long - LT view.

I suspect Karma only works on those who can actually benefit from it. I've always been hit with instant-Karma very consistently throughout my life -- pretty much never got away with nothin' when I was young (not that I ever did anything horrible, but every little infraction always hit me back).

Conversely, I have known truly *evil* people who get away with terrible things, seemingly without consequence. I don't think it comes back to them, because they're lost causes and, as such, actually serve some particular function in the grand scheme of things.

ST = a day or less, based on 3, 5 & 15 min. ES charts, for day tradesIT = over a day to a week, swing trades, based on the 60 & 120 chartsLT = longer view based on DAY & WEEK chart, for position traders

Unfortunately that's probably a pretty apt characterization. I doubt that the DMP file would do us any good. I can't recall ever poking into one but I'd bet it's probably binary or hex.

Oh well, it was worth a shot. If you can remember later though, when you're ready to call it a day, try putting it to sleep from the menu instead of closing the lid. That could yet tell us something useful.

But from New Zealand, to Australia, to China, to India, ... , everyone and their brothers in law are lowering interest rates. That is a lot of liquidity sloshing around. The market can stay irrational for a while. :)

Market is likely to rise from here until at least mid-morning or noon. Then (pure speculation), move back down to mid-afternoon, before rallying into the close ahead of AAPL earnings. That would imply a "W" shape for the day. Again, this is pure speculation - no guarantees...

...but, this could be the last head fake before a real down move begins tomorrow. The question is: will tomorrow pop and drop on AAPL or just gap down and drop due to something negative out of AAPL earnings?

I'm going with ....Too many bodies, not enough souls. But I've seen guys who have violated every decency in the name of their "duty" turnaround and become the biggest champions of decency. These are all SpecOps and alphabet agency vets who did the deeds, and now regret the stupidity of it all. They pretty much all became strict Constitutionalists who deny the label of R. or D. ... Well I'm just full of it today...I better just go and fill some orders.

...but, this could bethe last head fake before a real down move begins tomorrow. The question is:will tomorrow pop and drop on AAPL or just gap down and drop due to somethingnegative out of AAPL earnings?

I typically use 1-2.5... it can vary though, depending on what the market's doing. For example, if the market moves up to *just under* my stop and sits there bouncing ever so slightly up and down for a while, and it makes me *really really really* want to cover, then I might move my stop up a bit, because I assume that's exactly the purpose of the move... make the shorts cover.

Just to air the bull view here: keep in mind that if the black alternate count is in play, that could have been it for the decline -- with new highs above 1322 coming soon. SPX above 1318 would be a big red flag for bears.

Don't think that's going to be the case, because this morning bounce looks very corrective so far.

PL, you most likely have a faulty motherboard at this point (as a result of overheating), and HP will NEVER admit to it. The same way you ardently use stop losses in the market... you should employ a time/frustration stop loss on your laptop.

Went short at ES 1308. I'm going to give this trade some room, because I need to get to sleep soon. 6 points or so doesn't seem like an unreasonable risk to me -- if this is a nested 1-2, i-ii, there'll be a solid drop after this little rally ends. If not... well, there's always tonight/tomorrow if I get stopped.

Well, your fourth wave crosses the territory of your first wave, which is only allowed in a diagonal. Looking at the cash market, the two obvious options are either an a-b-c (complete) down for the alternate fourth wave count, or a nested 1-2, i-ii, due to the overlap. :) Subject: [pretzelcharts] Re: Pretzel Logic's Market Charts and Analysis: SPX Update: Bears' Turn Now?

It would seem like most, he has his moments. From an article in moneynews.com:

"Granville told newsletter readers to “Sell Everything” on Jan. 6, 1981. The Dow fell 2.4 percent the next day. He correctly forecast the bear market of 1977-78 and the burst of the Internet bubble that began in 2000. In March 2008, Granville said the Dow would end the year near 9,000, more than 27 percent below its level of 12,392.66 at the time. The gauge finished the year at 8,776.39.His predictions proved less prescient during some of the previous bull markets. He failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 while the S&P 500 rallied every year till 2000."

SPY (cash) = 131.43 is 50% retrace of the down move from yesterday's high. We're hovering right under it. If it holds, morning top is in, but could be broken to the upside in late afternoon. If it breaks decisively higher, then it is likely up from here on until the close.

I don't know why it keeps publishing the subject line... I have to reply by email 'cause your posts aren't on the blog yet. Anyway, you really have to watch that 1 and 4 don't cross the same price territory, or the count is invalid unless it's a leading or ending diagonal. Also, I'd recommend tackling the cash market first -- ES charts are very messy to begin with. Subject: [pretzelcharts] Re: Pretzel Logic's Market Charts and Analysis: SPX Update: Bears' Turn Now?

Ok, last chart attempt for a while. Wish I had your wave labeling capability with eSignal. Labeling by hand is a huge pain, and time consuming. If this chart plays even partially out, donation to PL. Now I know...(a tad on the *effort* of just drawing the chart). :)

Many times I hand label rather than auto, it is not always correct. Could come true but I am still wondering about the H&S idea. This mrkt has been so complex that it might be a while to break the spirit, and I am talking days, before we break out of my yellow triangle. Put out a theory, sit and watch mrkt validate or invalidate, adjust if necessary.

Thanks. :) Yeah, it's quite time consuming, especially when the count's unclear and you have to keep analyzing every little waveform ad nauseum as you label.

Time wise, it gets even worse on days I try to get fancy, like yesterday, where I combined two charts in Photoshop after labeling them... then had to keep redoing them to get the dates to line up in each chart. That one stupid chart took like an hour and a half. :D

Ed Carlson forcast for today (30-day free look):"Equities played out pretty much according to script on Monday. A new high followed by the beginning of a pullback - although the pullback certainly didn't get much traction. At this point we see no reason to become concerned about our 1/23/12 forecast for a top to the bear market rally. Having said that, we won't have any reason to become concerned if we're off by a day or two, either. This week, we be chillin'."

Did you know that if you click on the printer buton, located between the "Symbols" and "Reset" buttons that you can "Take Picture" ? What that gives you is a capture of only the chart portion of your screen for posting. Try it.

Question for ES trading gurus -- Does ES has a time premium built into the price like options? When trading options, even if you're on the right side of a trade, you can still lose money on that trade if you hold your calls/puts a bit too long.

Or, do you always gain (or lose) the same amount for every point of ES? If so, this can be one reason why ES is a better trade than options.

There is no time decay because the expiration is quite different. There is a rollover period toward the end of one contract to give people a chance to "rollover" to the new contracts. The new contract does have a different value, but the gains from your original remain in tact.

On a 2$ SPX range chart we spent Monday in the ultimate pain zone for individuals holding IT shorts. Will the recent highs become resistance or will they also be broken? I'm still looking for more negative fundamental numbers to start coming out to really roll the market over. I like to look at a range chart in addition to everything else as it sometimes filters out some of the noise.

Thank you all for your comments. I've a small AmeriTrade account that I've forgotten all about it until recently. Requested an upgrade to trade futures yesterday, and will try to be an ES newbie later today / or tomorrow. I'm hoping for beginner's luck!

Make sure to do your homework on the margin required for each type of contract, tick size, and the dollar value per tick. When you log into your TDAmeritrade account, click on Trade->Futures then look at the tabbed table at the bottom of the page. Some of the contracts are more highly leveraged than others, so be careful. Good luck!

there is difference, in this case a discount. In the market now we see the e-mini futures for March delivery (ESH12) with a discount of about 4-4.25 points. This is a reflection of two things, based on the 'cost of carry' futures pricing model. In the future, you don't have to put up the up-front cash of buying the securities, so you save the interest on that principal amount to the maturity date of the future (i.e. cost to borrow the money to buy the stocks). Money is cheap now (low interest rates) so this cost is currently pretty negligible. With the future, you don't get any of the benefits of owning the underlier, in this case the dividends associated with the index. So, since the dividend yield of SP is around 2% per year or .5% per quarter and .5% of 1300 is 6.25, the future started with about a 6.5 point discount when it had 90 days to maturity. The gap will close to zero as the maturity date of the future approaches.

Options are both a future (they settle at a future expiration date) and have the optionality component (the right but not the obligation yada yada yada). The optionality premium (or implied vol) fluctuates as demand for options changes. It tends to go up when underlying prices go down, and down when underlying prices go up. the latter is not always true in takeover plays for example.

How an option's price changes with respect to changes in the underlying's price is called an option's delta. All other things being equal, the higher the implied vol of an option, the higher the delta.

So for example AAPL implied vols will be through the roof today (and have been for a while) for Feb options in anticipation of the earnings announcement tonight. Tomorrow, unless the stock totally craters, implied vols WILL come in (because the event risk is over). So today maybe you are long some puts and they are up a dollar with the stock down three. The stock may be down six more dollars tomorrow but your put may only go up another dollar due to the contraction in implied volitility in the market for AAPL options.

All the market makers are always short options, so the implied volatility of the prices is always higher than the actual volatility seen in the underlying in the recent past...

be careful t winn, I would just sit and wait. When you hear PL, Michael, & me getting all hot then maybe do something. Again, feel we are building a shoulder, not a good time to explore. I am flat now after playing the down and up, and prolly will not do anything else today

And look at your futures commission structure. You pay commissions per contract per trade, so the strategy is slightly different from day trading an equity. With an equity, you can buy 10,000 shares for $9.99, let it move $0.01 and make a profit. With futures, they need to move a little since you can’t just load up on contracts for a flat fee.

Great Post Pretzel. I commented yesterday that bears should not take their eye of the big picture of indicators. Thats what's keeping me in the market. From a only technical perspective, with heavy fundamentals backing things up. I just can't get my head around this market going higher. Ok, it happened in 1995 catching all the bears of guard. The year 2000 was crazy and 2007 was all hype. The conditions are not right for another run up like that in my opinion. I may be proven wrong.

I am seeing a definite shift in momentum that is favoring the bears. In the past three days the strength and duration of the rallies have diminished as compared to prior days. We may still be a few days away from any strong declines, but bully looks noticeably weaker in recent days.

I just noticed something very interesting. I'm watching the $VIX Time n sales n charts and it just did a huge single down candle (18.63) to close the gap from yesterdays close. It was at 19.25 when it spiked down and returned. Gap filled and ready for Headline news to run up clean!

Everyday the same script. The VIX always pop and then drop. The best strategy for TVIX seems to be buy at close and sell at open 15 min. I am still waiting for my 30% gap up day for this baby.So what you are seeing is that VIX ready to skyrocket?

AAPL and AMZN were my best shorts last earnings season and I believe will be good plays this go around. AMZN is likely to report a loss and iphone sales have been slow in Europe and I think they stopped selling in China. These are sell the news plays. With Fed day tomorrow and in my opinion, NO QE which I think may be priced in: I've put on a handful of shorts about 1/2 hr ago including a VIX play.

Interesting that the RUT is looking stronger than the SPX. Does this mean anything? Will the SPX catch up to the RUT or will the RUT come down to the SPX. RUT looks like it wants to test yesterdays high while SPX is trying to get back to yesterday's close. 2$ range charts of SPX and RUT..

That has always been the most logical thinking, as most smaller companies rely on the strength of the larger firms as many of the SPX firms are their customers. RUT (being schizoid) often seems to flank the major indices...it makes me crazy. Anyone else have similar experiences?

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